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A Finite Agent Equilibrium in an Incomplete Market and its Strong Convergence to the Mean-Field Limit

Masaaki Fujii and Akihiko Takahashi
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Masaaki Fujii: Quantitative Finance Course, Graduate School of Economics, The University of Tokyo
Akihiko Takahashi: Quantitative Finance Course, Graduate School of Economics, The University of Tokyo

No CARF-F-495, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: We investigate the problem of equilibrium price formation in an incomplete securities market. Each financial firm (agent) tries to minimize its cost via continuous-time trading with a securities exchange while facing the systemic and idiosyncratic noises as well as the stochastic order-flows from its over-the-counter clients. We have shown, in the accompanying paper (Fujii & Takahashi) [19], that the solution to a certain forward backward stochastic differential equation of conditional McKean-Vlasov type gives a good approximate of the equilibrium price which clears the market in the large population limit. In this work, we prove the existence of a unique market clearing equilibrium among the heterogeneous agents of finite population size. We show the strong convergence to the corresponding mean-field limit given in [19] under suitable conditions. In particular, we provide the stability relation between the market clearing price for the heterogeneous agents and that for the homogeneous mean-field limit.

Pages: 25
Date: 2020-10
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